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Thursday, 23 March 1961

Mr HAROLD HOLT (Higgins) (Treasurer) . - by leave - Mr. Speaker, in my statement to the House on 15th November, I announced that the Government had decided to introduce measures to establish a minimum level of 30 per cent. for the ratio of public authority securities to the overall investments of life companies and of superannuation and provident funds. I also announced that the legislation to give effect to this would provide that, of the amount of 30 per cent. to be held in public authority securities, not less than two-thirds was to be invested in Commonwealth securities. Since then, Cabinet has on a number of occasions considered the detailed arrangements which will be necessary to give effect to these decisions. 1 had hoped that it would be possible to introduce the new legislation to-night. However, while the Government has taken its decisions on the principles of the proposal, the drafting of the legislation has taken rather longer than I had expected, and it will not now be possible to introduce the new legislation until shortly after Easter. In view of the wide interest which has been displayed by both the public and investment institutions generally, I have thought it desirable to give, in the House, this earlier indication by way of a brief summary of what the Government intends. At least, it will be as brief as the details permit.

Over the years, the Commonwealth Government has looked with favour on the increasing amount of personal insurance in Australia, which represents a most important form of individual saving. The life companies have been well conducted and, as custodians of an increasingly large volume of community savings, they have acquired a certain institutional status which has not been without importance for their rapid growth and commercial success. Because of this, special status and- the. recognition by governments that these institutions have been traditional, sources of substantial investment in securities-' offered by the governments of. the Commonwealth, and the States, successive Commonwealth, governments have- accorded the life companies specially favorable taxation treatment. It has. been calculated, that the average rate of. tax which they pay on their total assessable income, is, on. the average, less than ls: 6d. in the £1. Honorable gentlemen who can. compare this with the normal company rates will know how much lower this, rate is. There are two principal factors producing this low average rate of tax. The first, is that, when arriving at the amount to be taxed, section 115 of the Income. Tax and Social Services Contribution Assessment Act entitles a life company to a. special, deduction from, assessable income which is designed to free from tax an amount ranging from H per cent, to 3 per cent, of its Australian policy reserves. This means in effect that between one-third and one-half, of the Australian investment income of most life companies is tax free.

As with all- other resident companies, life companies are also entitled- to a rebate; under' section 46 of the same act, in1 respect of dividends included in their taxable income, but, whereas dividends received by other companies become taxable income when they are distributed! im due course to their own- shareholders, dividends received by the life companies can be distributed to policy-holders- tax free, since- reversionary bonuses on life policies ame not subject to tax. With- the increased holdings of company shares by the life companies, this has become an increasingly valuable privilege. Indeed, it produces- a sort' of inbuilt discrimination against" government securities, the income front which is' taxable, and it thereby tends te increase the attraction of company equity investment. This? is a consequence certainly never intended when the: provision: was introduced and, in fact, is. a consequence which, runs counter to the wish of past governments, as well as that of the present one, that a- large- proportion of. insurance investment- should be i» government securities:. But- while1 the life- companies,. as> has- bean- seen, pay very little tax. indeed, the position of the privately managed; superannuation and. provident funds is even more favorable. The vast majority of them are completely tax free.

The amount of funds, coming into the hands of the life companies and the privately managed superannuation and provident funds has been increased very considerably by other tax. concessions, notably the substantial tax concessions granted to policy-holders and others in respect of life insurance premiums and. contributions to the superannuation, and provident, funds. These concessions, I might recall,, relate not only to payments of. life insurance premiums,, superannuation contributions and the like by individual taxpayers,, but also to contributions by employers in respect of their, employees. Individual taxpayers may deduct such payments up to a maximum, of £400 each year, the limit having been £150 in 1949 when the concession was in the form of a rebate, and having been raised from' £300 as an outright deduction in the 1959-60 Budget. This concession alone, it has been, estimated, now results in about £35,000;O00' of revenue being forgone by the Commonwealth. Except in special cases, the maximum deduction allowable to employers for contributions to pension and retirement funds on behalf of their employees is £200, or' 5 per cent, of the employee's annual remuneration, whichever is the greater. A further amount of about £9,000,000 is forgone from revenue as a result of this concession.

The total Australian' assets of the life companies now exceed £1,000,000,000. The rate of growth of these assets is indicated by the- fact that in 1944 they were less than £300,000,000: They grew by about £90,000,000 in 1960 and are estimated to be increasing at the" rate of about 10 per cent, per annum. Assets of the separately managed1 superannuation and provident schemes- are- increasing even more rapidly and were approaching- £600,000,000 in 1960, after having been less than £200,000,000- in 1-951., The annual rate of increase is of. the order of 15- per cent Approximately half of these assets are in privately managed- superannuation schemes and- the remainder im Commonwealth and State public service and similar, superannua-tion schemes.

Policy-holders in the life insurance companies and contributors to superannuation and provident funds have a direct interest in the stability of the currency and the avoidance of inflation. They have an interest, as citizens, in sound national industrial development assisted by essential government programmes of works, utilities and services of a great variety of kinds. They are taxpayers for the most part, and thus have an interest in the successful financing of these governmental programmes from loan proceeds rather than from direct taxation. All these things can be materially helped by a reasonable proportion of investment in governmental securities of the assets of these sources of community savings. In fact, however, the life companies and the privately managed funds have been progressively reducing the proportion of community savings coming into their hands which they invest in public authority securities.

As an example of the reduced support which public authorities have received from the life companies over recent years, they increased their total assets by £562,000,000 between 1949 and 1959, but they increased their net holdings of Commonwealth securities by only £4,000,000 in that period. Semi-governmental securities fared a little better than Commonwealth securities, with an increase of £77,000,000, but the remaining £481,000,000 of the total increase was applied to investments other than public authority securities.

Whereas life companies held 50 per cent, of their assets in Commonwealth and semigovernmental securities in 1939 when the long-term bond rate was 3i per cent., and 68 per cent, in 1949 when the long-term bond rate was 3i per cent., the proportion had fallen to 37 per cent, by 1959. Only incomplete details are available in 1960, but it appears that the proportion in that year was less than 33 per cent. The longterm bond rate in the latest Commonwealth loan was 51 per cent.

Figures available for a number of the larger privately managed superannuation funds showed that they held only 1 1 per cent, of their assets in Commonwealth securities in 1959, compared with 20 per cent, in 1956, and that these larger funds have actually been reducing their holdings of Commonwealth securities over the last few years. This reduced support for public authority loans by the life companies and the privately managed funds has been a major factor adding to the difficulties we have faced in recent years in financing Commonwealth and State works programmes. Over the last ten years, more than 60 per cent, of Commonwealth and State capital works expenditure has had to be financed ultimately from Commonwealth taxation revenue. The total amount supplied from revenue over this period exceeds £2,000,000,000, a heavy burden on this generation of taxpayers for public assets which will, for the most part, be servicing many generations to come. For this financial year, the proportion looks like being 65 per cent., or nearly two-thirds - £274,000,000 - of the total programme of £424,000,000. In other words, Commonwealth taxation has had to be much higher than would have been necessary had public authorities shared more fairly in community savings, including the large and rapidly growing volume of such savings of which the life companies and the private funds have been the custodians.

There are thus good grounds, I suggest, for the view that, of the large amount of community savings being deposited with the life companies and the superannuation funds, a reasonable proportion should be channelled back through public authorities to finance essential community services. I might mention that more than once since it assumed office in 1949 this Government has sought, by discussion with representatives of the life companies, to obtain greater support by them for Commonwealth securities, but the companies have, in total, continued to reduce their support. In fairness to the general taxpayer, and having regard to the need for a more balanced use of community savings to sustain sound national expansion, the Government reached the conclusion that action to check this drift was necessary.

This, then, was the background which prompted the Government to decide that life insurance companies and superannuation and provident funds would be required to keep a minimum amount of their assets in the form of public authority securities, with at least two-thirds of that amount in the form of Commonwealth securities.

Following the announcement of the Government's position, there has been, as was expected, much press and public comment and some criticism of the proposals, more particularly from the life insurance companies and from spokesmen for the superannuation and provident funds. Some of this criticism was based - wrongly in my view - on the proposition that we were singling out the life insurance companies and superannuation funds from all other institutions by requiring them to hold a certain proportion of their assets in public authority securities. But, as I have pointed out, those institutions had already been singled out for considerable taxation concessions not enjoyed by other businesses. The Government, as is proper, has given careful study to all these views, both as they affect the life companies and as they affect the superannuation and provident funds. We believe we now have a set of proposals which should be acceptable to, and of potential advantage to, all of the life companies now operating in Australia. First let me clear the ground of a few aspects and then summarize the proposals briefly.

The proposals are based on a combination of incentive and disincentive. They enable life companies and superannuation and provident funds to decide for themselves whether or not they will conform with a certain pattern of investment in public authority securities. None of the proposals requires any action by the individual policy holder or superannuation or provident fund contributor. They invite action by the life companies and the private funds - not by the individual.

In the case of the private superannuation and provident funds, the position, broadly speaking, will be that, subject to relatively minor arrangements, they will not be subjected to any tax disadvantage in respect of their investment income earned up to the level of 1960-61. The proposals are essentially prospective in approach. In the case of the life insurance companies, however, past investment is brought into calculation, because a purely prospective approach would work unfairly among companies with different existing holdings of public authority securities, as they are in active commercial competition with each other.

I repeat, that under our new proposals there will be no compulsory direction of the overall investment of a life company or a privately-managed fund, and they will be entirely free to control their own pattern of investment. However, we do propose to alter the taxation arrangements in such a way that some financial advantages will be available to those companies and funds which co-operate in achieving the Government's broad objectives. The scheme provides that there will be different taxation treatment, depending on whether life companies and privately managed funds maintain what I shall call a " 30/20 per cent, ratio " in relation to holdings of public authority securities, or new investments in those securities. This 30/20 per cent, ratio means that at least 30 per cent, of Australian assets, or increases in assets, should be in the form of public authority securities, including at least 20 per cent, of assets, or increases in assets, in the form of Commonwealth securities.

Let me deal first with the superannuation and provident funds. The present investments of many of these funds are already tied up tightly in assets of a very illiquid nature. Some of the funds have no investment at all in public authority securities. As the majority of them are completely exempt from taxation, the 2s. in the £1 income tax rebate available on Commonwealth loan interest is of no advantage to them, and many of the funds have, therefore, made much greater investments in semi-government securities than in Commonwealth securities because of the differential in the nominal interest rates.

In order to comply with both sections of the 30/20 per cent, ratio in relation to their total assets within even a moderately long period, certain of the funds would have to realize some of their existing assets, including in some cases semi-government securities. It has accordingly been decided not to attempt to direct or to induce the re-arrangement of the existing assets of the privately managed funds. Attention will therefore be directed only to the future annual increases in the investible resources of the funds.

Privately managed funds which are now at or below the 30/20 per cent, ratio in relation to their total assets will remain tax-free on all investment income, provided that they retain an amount of public authority securities equal to that which they held on 1st March, 1961, and invest not less than 30 per cent. of their future accruing resources in public authority securities, including not less than 20 per cent, in the form of Commonwealth securities.

Any fund which has a present " surplus " over .the 30/20 per cent, ratio in relation to total assets will be allowed to offset this against, the future annual investments of accruing resources which would otherwise be necessary to qualify for tax exemption.

In the case of any funds which choose not "to arrange the investment of annual increases in assets in accordance with the 30/20 per cent, ratio, it is proposed to limit the taxation exemption to the 1960-61 level of investment income, but this exemption will only apply if existing holdings of public authority 'securities are maintained. Full details of taxation arrangements for these funds will he announced when .the legislation is introduced.

Generally speaking, all privately managed funds which are now exempt from taxation will be able to remain exempt from taxation on investment income at least up to the 1960-61 level. However, privately managed funds will not be able to retain their exemption from tax if the existing fund is closed at the present level and existing holdings of public authority securities are transferred to a newly created fund.

These provisions will come into effect in respect of the 1961-62 income year.

The provisions will apply to all provident, benefit, superannuation or retirement funds which would now be entitled to taxation exemption under Section 23 (j) or (ja) of the Income Tax Assessment Act, but medical and hospital benefit funds and funeral benefit funds will be excluded. There are of course certain overseas superannuation funds which have no connexion with Australia, apart from the fact that they invest funds here. It is not proposed to alter the tax exemption at present allowed to such funds.

There will be provision for the Commissioner of Taxation to exercise his discretion in cases where great hardship could result for a privately-managed fund during any year of income through its inability to arrange its investments in accordance with the proposed provisions, or where the trustees have made a gen Joe and bona fide attempt to achieve the prescribed ratios, but have temporarily or inadvertently failed to comply.

It is proposed to institute broadly similar arrangements in relation to that part of the business of life insurance companies which is concerned with the provision of superannuation benefits of a type similar to those provided by private funds which are now exempt from taxation under the existing provisions.

For some time past, the life companies have claimed that it was .anomalous that the investment earnings of privately-managed superannuation funds should be entirely free of tax, while earnings derived from life company investments in pursuance of superannuation (business is taxable under .the normal life company conditions. It is true that, because of the very large and somewhat arbitrary deductions .allowed to life companies, their effective rate .of tax is something less than ls. 6d. in the £1 on their net investment income, hut even this is held by the life 'Companies to place them at a competitive disadvantage with the privately-managed superannuation funds when they are soliciting superannuation business. The new proposals will correct this position for .any life company which ensures that the .desired ratios of public investment are observed in the investment of funds arising from that -superannuation business. However, .they will not be eligible -for this concession and other concessions unless they also make certain arrangements., which I shall outline later, concerning the investment of the funds arising out of their other life insurance business.

In order to make the correction of this anomaly administratively practicable, it will be necessary for the life companies to set up a separate statutory fund relating -to assets arising from their superannuation business. This will be more or less a bookkeeping operation. Indeed, it is difficult to devise a method of meeting their wish to .have this taxation concession given to them without making such a separation of their statutory funds.

The fairest method of allocating existing assets between the two funds would be to do so as near as practicable to a pro rata basis. As this method would also have certain administrative advantages, it has been decided to adopt it as the basis of allocation.

The main purpose of the separation of assets is thus to enable companies which arrange their investments in a certain way to be fully exempted from income tax on interest arising from their approved superannuation business, and to receive the full benefit of the proposed financial inventives. If the full benefits are to be received from 1st July, 1961, the separation of assets will have to be made as at 30th June, 1961, or an earlier date.

The companies will also, no doubt, wish to set up a separate statutory fund in order to exclude their oversea assets from the 30/20 per cent, requirements. Provision will also be made for this.

To obtain freedom from tax on their superannuation business, the companies will have to ensure firstly that, during the year of income, they had held not less than the 30/20 per cent, ratio in relation to the total assets of their superannuation statutory fund. However, companies below that ratio which desire to build up to it as part of an approved pattern of investment - which I shall explain later - will also be fully exempted from taxation on their superannuation business. Secondly, they will have to ensure that they have also become eligible for the special arrangements proposed to be allowed for investment income from their other Australian life business.

The arrangement of its investments in this manner will automatically mean that, as will be the case with the privately-1 managed funds, a life company can qualify for full tax exemption on its superannuation income. Also, as with the privatelymanaged funds, it will be possible for any initial surplus over the 30/20 per cent, ratio in the statutory superannuation fund to be offset against future requirements to invest superannuation assets in public authority securities.

Companies which choose not to arrange their investments in the manner which I have outlined will still have the whole of their superannuation income taxed at the same rates as at present, but certain adjustments will be made to the section 46 rebates and section 115 deductions which I have mentioned earlier.

The general effect of these adjustments will be that the income from superannuation business of these life companies in excess of the 1960-61 level will be taxed on a somewhat similar basis to the investment income in excess of the 1960-61 level of privately-managed superannuation and provident funds which choose not to arrange their new investment in accordance with the 30/20 per cent, ratio.

It is proposed to alter the taxation arrangements relating to investment income arising out of the ordinary Australian life business of life companies in a way which will make that business less profitable if they choose not to invest in public authority securities in accordance with the 30/20 per cent, ratios, and progressively more profitable as they move up towards or improve upon those ratios.

Mr Calwell - I thought you were opposed to socialism!

Mr HAROLD HOLT - The honorable gentleman will find, as he goes along in his public career, that there is a wide and unbridgeable gulf between us.

Mr Calwell - It is growing narrower all the time.

Mr HAROLD HOLT - Oh, no. The honorable gentleman wishes to change the face of Australia, but the face of Australia after he had finished with it would be very different from the face of Australia that I would like to see result from the implementation of our policies. What we are trying to do is so to expand and improve the welfare of the people of Australia that they will look to the 1960's as being the greatest decade in their history. I know honorable gentlemen opposite are not very comfortable about these arrangements, which we believe will commend themselves to all thoughtful people who have taken the trouble to study this problem as being fair and reasonable. Our friends opposite continue to interject.

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